STANLIB Podcasts

US data released this past week points to less concern about inflation and more concern about the labour market. The Federal Reserve has kept interest rates unchanged at 5.25% to 5.50%, and the forward guidance is a more confident outlook for inflation, with the Fed comfortable of reaching its inflation target within the next year or so.

The Fed is now focusing more on its dual mandate of keeping inflation under control and ensuring the labour market remains strong.

The deterioration in the US labour market, as the unemployment rate moved from 4.1% to 4.3% in July, and inflation mostly under control, are justifying that it is time to start the interest rate cutting cycle, and the Fed is expected to cut rates by at least 25 basis points in September, and to continue cutting interest rates thereafter.

Labour market conditions have slowed meaningfully and suggest that the US economy is going to lose momentum, and that the risk of recession has risen appreciably, while financial markets have only priced for a moderate slowdown in activity.

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US GDP growth in Q2 2024 was 2.8% q/q, well above expectations for 1.9%. About half of this came from growth in inventories and government spending pre-election, which is not necessarily sustainable. Since there is evidence that consumer demand is softening, the underlying dynamic is that US growth is easing but the economy is not moving into recession.

Although SA’s CPI rate for June was above the Reserve Bank’s target at 5.1% y/y, inflation is expected to fall for the remainder of the year, which would allow for an interest rate cut. The main contributors to CPI for the month were a decline in the petrol price (with another due in July); an increase in non-alcoholic beverage prices but not food prices as a whole; and a substantial increase in rental inflation, although on an annual basis rental inflation remains modest.

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The STANLIB Flexible Income Fund delivered a pleasing 3.2% return in Q2 2024 vs 2.3% for the benchmark, despite an eventful quarter, says Sylvester Kobo, Deputy Head of Fixed Income at STANLIB. The fund made dynamic asset allocation and duration decisions, especially before and after the South African election. The R57.5 billion STANLIB Income Fund, which has delivered an above-inflation return of 10.5% in the year to June, is positioned to maintain yield in anticipation of a total of 1.25% of interest rate cuts in SA: two this year and three next year.

The resilience of the US equity market, and especially the tech sector, continued to surprise investors in Q2 2024, says Marius Oberholzer, STANLIB’s Head of Multi-Asset. For the rest of 2024, he anticipates risks around global geopolitics, with elections seeing a swing to the right, fiscal deficits, and whether inflation data continues to soften. China remains a concern for all investors. Although he recommends South African investors maintain a reasonable level of offshore exposure, at about 35-40% of a total portfolio, he says SA is beginning to attract more investor interest.

The STANLIB Enhanced Multi-Style Equity Fund slightly underperformed its benchmark in Q2 2024 due to its underweight in Anglo American, which was buoyed by the BHP bid, says Rademeyer Vermaak, Head of Systematic Solutions. However, over any rolling three-year period, the fund has consistently beaten its benchmark, reflecting its focus on the intersection of quality, value and growth to build robust portfolios. Over the next 3-6 months, Vermaak expects the market-friendly GNU in SA, together with a rate cut by the SARB, will support the domestic equity market.

Although the Magnificent 7 stocks in the US are expected to continue delivering margin growth, opportunities are now opening up in more defensive sectors of the US market, such as consumer staples, says Amit Parmar, Investment Specialist – International Equity Group, J.P. Morgan Asset Management. Parmar said Q2 was positive for the STANLIB Global Select Fund, sub-managed by JPMAM, as it delivered 1% above the MSCI World Index. Going into the second half, the team’s view about the macroeconomic environment and corporate earnings has resulted in a more cautious positioning for the fund.

At its latest Monetary Policy Committee meeting, the South African Reserve Bank kept the repo rate unchanged at 8.25% but two members argued for a cut of 25 bps, which is an indication of future direction. The committee revised its forecast of end-of-year inflation to 4.3% from 5.2% at present. We expect the bank will cut the repo rate by 25 bps at its September meeting and by another 25 bps in November.

SA’s May retail sales data was disappointing: sales fell 0.7% m/m. Mining and manufacturing output also declined in May. The improvement in electricity generation has helped, but it is not a solution in itself. The only way to lift the growth rate meaningfully is to bring the public sector into partnership with government to invest in infrastructure, and this is starting to happen.

US inflation data for June delivered positive news for potential interest rate cuts. It showed a 0.1% m/m decline, while the market expected a 0.1% m/m increase. Much of the decline was related to energy prices, which fell 2% m/m, while the increase in shelter inflation, at +0.2%, was more muted than in previous months. As a result, on an annual basis, US headline inflation is down to 3% and core inflation to 3.3%. Although this is a little high compared with the US Federal Reserve target of 2%, it opens the possibility that the Fed will start to cut rates in September and cut again before the end of this year. An easing of US interest rates will bring relief to other central banks as well as to financial markets.

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A consistent message is coming through latest US labour market data releases: labour market conditions are softening as high interest rates are having an impact. Although the US added 206,000 jobs in June, more than expected, many are being generated in non-cyclical sectors like government, education and health care. The unemployment rate is now 4.1% and seems to be edging higher. We believe the US Federal Reserve may be able to consider cutting interest rates by 25 bps at its September FOMC meeting.

It has been more than 100 days since SA experienced load shedding. The Electricity Availability Factor (EAF) has held above 60% for over two months and although unplanned maintenance is still significant, it appears to be holding at a relatively low level. However, to grow the economy faster than 1-1.5% a year, SA needs more electricity capacity. Lack of sufficient power generation remains a key hindrance to the country’s growth ambitions. Click here to listen to the podcast.

In SA’s new Government of National Unity (GNU) Cabinet, the number of ministers and deputy ministers has grown, which is costly, and there are a lot of new faces in Cabinet whose competence cannot be judged yet. However, there are positive aspects: there is continuity in the key economic cluster, implying that fiscal policy is likely to stay the same, and reform of SOEs is expected to continue under the Presidency.

SA’s PPI inflation rate for May at 4.6% was below market expectations, and the details were encouraging, other than for manufactured food inflation. Trends should lead to interest rate cuts starting in September. In the US, core PCE was also in line with expectations at 2.6%, close to the US Federal Reserve’s 2% target, and a September interest rate cut remains on the horizon.

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